Government Macroeconomic Objectives (AQA A Level Economics)

An Introduction to Macroeconomic Objectives

• Macroeconomic Objectives are goals set by the government aimed at improving the overall economic performance of a country as well as the quality of life of its citizens

Diagram: The Macroeconomic Objectives

• The government aims to achieve these objectives through the use of macroeconomic policies

• It can be difficult to achieve some outcomes simultaneously

  • E.g. High economic growth and stable price levels can be in conflict with one another

Economic Growth

• Economic growth is a central macroeconomic aim of most governments

• Many developed nations (UK included) have an annual target rate of 2–3%

  • This is considered to be sustainable growth

  • Growth at this rate is less likely to cause excessive demand pull inflation 

• Politicians often use it as a metric of the effectiveness of their policies and leadership

• Economic growth has positive impacts on confidence, consumption, investment, employment, incomes, living standards and government budgets

• Strong economic growth means higher incomes, lower unemployment rates and better government budgets

• Sustainable economic growth will have less demand-pull inflationary pressures or excessive environmental pressure
  

Graph: UK Economic Growth Rates up to 2023

(Source: Macrotrends)

Growth trends 

• An increase in real GDP is a sign that the economy is expanding and employment is increasing

• A fall in real GDP (-11% in 2020) caused by Covid restrictions is a sign economy is contracting

• In 2021 and 2022, real GDP growth rate shows signs of recovery post-Covid restrictions

  • High inflation rates also occurred during this period 

UK Economic Growth Trends 2019–2022

Price Stability

• The UK has a target inflation rate of 2% using the Consumer Price Index (CPI)

• A low rate of inflation is desirable, as it is a symptom of economic growth

• The different causes of inflation (cost push or demand pull) require different policy responses from the Government

  • Demand-side policies ease demand pull inflation

  • Supply-side policies ease cost push inflation

Graph:UK Inflation Rates up to 2022

(Source: Macrotrends)

Inflation trends for 2015–2023

• In the period following the pandemic, inflation rates have exceeded the target rate of 2%

• The CPI peaked at around 8% in 2023

• This is due to supply chain disruptions causing cost-push inflation 

• Increased spending following the pandemic caused demand-pull inflation 

• The Bank of England (BoE) uses monetary policy to observe and regulate inflation rate

Minimising Unemployment Levels

• The target unemployment rate for the UK is 4–5%
  

• This is close to the full employment level of labour (Y_FE)

  • There will always be a level of frictional unemployment

  • This makes it impossible to achieve 100% employment 

• Within the broader unemployment rate, there is an increased emphasis on the unemployment rate within different sections of the population

  • E.g. youth unemployment, ethnic/racial unemployment by group

    • In 2021, black unemployment in the UK was 11% and white unemployment was 4.1% 

• Low levels of unemployment are a sign of a strongly performing economy and are inversely linked to real GDP growth 

  • When real GDP increases, unemployment falls

  • When real GDP decreases, unemployment rises

Graph: UK Unemployment Rates up to 2024

Source: Macrotrends

Unemployment trends

• In the six years following the 2007 financial crisis, unemployment in the UK remained relatively high 

• It declined during economic recovery in 2012, reaching lowest levels just before Covid pandemic

• However, with restrictions, unemployment rose again 

• Unemployment increased from 2021 to 2022, but decreased by just over 1% in 2023

Stable Balance of Payments on Current Account

• The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world

  • The current account focuses mainly on the financial transactions related to exports and imports of goods and services

• Governments aim for Balance of Payments equilibrium on the Current Account

  • If exports > imports, it will create a current account surplus

  • If imports > exports, it will create a current account deficit

    • Each one of these conditions has advantages and disadvantages associated with it

    • However, a current account deficit is more problematic in the long-run

• The UK has traditionally run a small deficit

  • As a percentage of GDP, the UK current account deficit is insignificant so has not been problematic
    

Graph: The UK Trade Deficit up to 2022

(Source: Macrotrends)

Graph analysis

• The U.K. trade balance for 2019 was $-46.14B, a 4.78% increase from 2018

• The U.K. trade balance for 2020 was $9.69B, a 121% decline from 2019

• The U.K. trade balance for 2021 was $-38.56B, a 498.05% decline from 2020.

• The U.K. trade balance for 2022 was $-106.79B, a 176.91% increase from 2021

• The UK offsets its negative trade in goods with a very positive trade in services

Balancing the Government Budget

• The Government Budget is presented annually and includes the forecasted revenue and expenditure

Examples of Government Revenue and Expenditure

• The UK Government aims to run a balanced budget

  • If expenditure > revenue, there is a budget deficit

  • Any deficit has to be financed through public-sector borrowing

  • Any borrowing is added to the public sector debt(Government debt)

• If the UK government's debt becomes too high (expressed as a % of GDP), then lenders begin to lose confidence in the Government's ability to repay the debt

  • The Government then has to raise the interest rate it offers to lenders, which makes borrowing more expensive

• The UK Government has worked extremely hard recently to reduce the budget deficit and run a balanced budget

  • COVID-19 expenditure has eroded the progress they made

Graph Showing the UK Government Debt to GDP Ratio

Source: Macrotrends

Debt to GDP insights 

• The Debt-to-GDP ratio reflects a notable surge in government debt relative to GDP, rising from 30% in the 1990s to 186% in 2020.

  • This signals a substantial increase in government borrowing

• Reducing the deficit can mean tough choices for the economy

  • E.g. Cutting public sector pay; raising taxes; reducing unemployment benefits; reducing spending on merit goods

• The significant deficit increase in the 2020/21 budget due to COVID-19 will need to be repaid

  • The short-term help offered through the crisis may generate long-term pain as the Government seeks to cut future spending so as to repay the debt

Environmental Protection

• The UK government aims to ensure sustainable economic development and reduce adverse impacts on the environment 
  

• In April 2021, the UK Government stated that their environmental aim was to reduce emissions by 78% by 2035

  • This reduction is based on the emission levels of 1990

  • It is one of the most ambitious climate change targets globally

  • It includes the UK’s share of international aviation and shipping emissions

• Broader environmental aims include

  • A focus on sustainability

  • The reduction of negative externalities of production

  • 100% energy from renewable sources by 2035

Equity in the Distribution of Income

• Equitable distribution ensures fairness and allows the same opportunities for everyone

• The aim is not equality of distribution as it removes the incentive to work and study

• High levels of income inequality can create social unrest 

• Income inequality is measured using the Gini Coefficient 

Income Inequality for 2020 using Gini Coefficient 

• The higher the Gini coefficient, the more unequal the distribution of income

  • 0 = complete equality; 1 = complete inequality

  • Most developed economies have a Gini target of 0.3–0.4 

• There is a need for the UK government to intervene to maintain acceptable levels of income inequality. Governments can redistribute income 

  • Through a progressive tax system

  • Providing essential [popover id="KzHY6wVtuflFJQub" label="merit goods"] such as healthcare and education